DNA methylation is critical for normal development, but questions remain regarding its role in gene regulation. To study the role of DNA methylation during cellular differentiation epigenetics section used the Lsh-/- (KO) mouse as a model for cytosine hypomethylation. Lsh belongs to a family of chromatin remodeling proteins, and Lsh deletion in mice causes a 50% reduction of cytosine methylation. Using murine embryonal fibroblasts (MEFs) derived from Lsh-/- and wild type mice the epigenetics section mapped cytosine methylation at single-base resolution using whole genome bisulfite sequencing. Despite extensive CG methylation losses at immediate promoter regions, RNA transcript levels were largely preserved in Lsh-/- MEFs. However, the distribution of histone 3 lysine 4 mono-methylation (H3K4me1) an epigenetic mark for potential enhancer sites, was altered in Lsh-/- MEFs. Lsh-/- MEFs show about 10% increase of H3K4me1 modifications, and a subset of novel marks cluster at neural lineage genes. Moreover, the genomic position of H3K4me1 modifications in Lsh-/- genome is not random, but centers at CG hypomethylated sites. Re-introduction of wild type Lsh into Lsh-/- MEFs can in part restore cytosine methylation and reduce H3K4me1 marks to wild type levels indicating a dynamic relationship between CG methylation and H3K4me1 marks. In addition, CG hypomethylation caused by siDnmt1 treatment, can in part mimic Lsh deletion supporting the relationship of CG hypomethylation and the occurrence of H3K4me1 marks. In order to test the functional consequences of de novo potential enhancer marked by H3K4me1, Lsh-/- MEFs were reprogrammed into induced pluripotent cells (iPS) and challenged to differentiate into the neural lineage. Lsh-/- iPS that were treated in vitro with retinoic acid showed accelerated neural lineage differentiation compared to wild type iPS. Furthermore, teratoma derived from Lsh-/- iPS showed enhanced neuroepithelial marker expression suggesting a propensity of Lsh-/- cells towards the neural lineage. Genes that were pre-marked in Lsh-/- MEFs had maintained H3K4me1 modifications and CG hypomethylation and showed increased expression in Lsh-/- iPS. This suggested that these epigenetic marks had escaped reprogramming and preserved an epigenetic memory for gene expression. Furthermore, several H3K4me1 sites acquired histone 3 lysine 27 acetylation an indicator of functional activity. Sublconing of H3K4me1 sequences revealed enhancer activity in a reporter assay, further suggesting a functional switch or H3K4me1 marked sites from a potential enhancer state to a functional enhancer activity. Finally, several transcription factors were identified that showed differential enrichment at H3K4me1 sites in Lsh-/- MEFs compared to wild type MEFs. Increase in TF occupancy was accompanied by enhanced histone methyltranferase recruitment suggesting that differential engagement of transcription factors at CG hypomethylated loci can be in part responsible for divergent H3K4me1 marks in the Lsh-/- hypomethylated genome. Our results demonstrate that CG hypomethylation is associated with distinct distribution of potential enhancer sites that can be preserved as epigenetic memory through reprogramming and influence developmental plasticity. Our results are relevant for regenerative Medicine, emphasizing the importance of appropriate reprogramming and cellular differentiation to gain and maintain the proper cellular phenotype. Furthermore, CG hypomethylation is associated with human pathologic conditions, including inflammation, aging and cancer and may lead to aberrant enhancer formation thus promoting cellular transformation.